The future is uncertain. Its variables are numerous and unpredictable. Any scenario we imagine or compute, will shortly be outdated by events. What is needed in retirement is a “compass” or “fuel gauge,” not a hard number — which will be wrong, soon enough obviously so. You need to know if you’re on track at a given point in time, and then revisit that analysis on a regular basis.
Just some of the more important, and unpredictable, variables in the retirement equation include: stock/bond market returns, inflation rates, interest rates, and tax rates. The most confounding variable of all may be your life expectancy. The only truly accurate answer to the retirement equation comes when you leave this world: Did you run out of money, or not?
Retirement calculators are plentiful on the web. Use several, but use them with caution. Some of the problems I experienced when using various calculators to analyze my own retirement included: bugs in asset allocation, overly conservative tax rate assumptions, inaccurate Social Security assumptions, spurious expenses, bugs in date handling, inflexible data input for near-retirement scenarios, limitations in summary/detail reports, confusing user interfaces, and obviously nonsensical results…
- Begin assessing your retirement cash flow with the simplest approach: Subtract expected Social Security or pension payments from your living expenses. Then see if a 3-4% annual safe withdrawal rate from your savings is enough to cover the difference.
- For refinement, use several (at least three) retirement calculators, so you develop a picture or “model” of cash flow during your retirement, instead of a single, simplistic “answer.”
- If you don’t have access to good retirement calculators from trusted financial institutions, evaluate the offerings from Schwab or E*Trade — which were some of the better I’ve found.
- If you must make assumptions about inflation, investment returns, or tax rates: start with the historical averages, but make them a little more conservative. And realize that every assumption compounds the potential error in your answer.
- Revisit your analysis at least quarterly as you near retirement. Realize that modeling different scenarios, so you get a feel for the input variables and the impact of potential changes to them, is much more useful and realistic than computing, and clinging to, a single “magic number.”